Emerging economies under pressure as currencies weaken

Last week, the Turkish central bank raised its interest rate by 3 percentage points to 16.5 per cent in an effort to stabilise its plunging currency. Since January this year, the Turkish lira has fallen by more than 20 per cent.

But Turkey is not alone. Across the world, emerging market currencies have weakened against the dollar. The Brazilian real has fallen by more than 9%, while the Indian rupee has declined by more than 7 per cent.

To stabilise their currencies, emerging economies’ central banks are drawing on their foreign exchange reserves to intervene in order to shore up their currencies. A resurgent dollar coupled with local economic issues has led to a flight of the dollar. 

The US treasury yields have soared over the past month. Many analysts are now expecting a healthy US economic growth to prompt the US Federal Reserve to increase rates further this year. This could reduce the interest rate differential between the US and emerging markets, causing investors to pull out of the emerging markets. 

FII: Foreign institutional investor

GDP: Gross domestic product

Source: Bloomberg

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